The US Federal Reserve has shocked markets today with a significant cut to the US interest rate, in a move to protect the US economy from the growing impact of the coronavirus.
The Fed isn’t due to hold an official meeting for another two weeks, but announced this afternoon they are cutting the benchmark rate by 0.5%. This takes the rate range down from between 1.5% - 1.75% to between 1% and 1.25%.
The cut is the first emergency rate reduction since 2008, when the financial crisis was ravaging the global economy. It is also the fourth rate cut since July last year and the biggest in over a decade; highlighting the increase in economic uncertainty that dominated 2019 and 2020.
A meeting of G7 financial leaders earlier today gave a somewhat lacklustre “wait-and-see” statement, but the Fed’s response is more in-line with analyst expectations. The rate cut will help reduce the financial burden on the US economy, but stock markets failed to react positively to the news. Although rallying initially this soon ended, with investors worrying the rate cut will do little to encourage consumers to actually spend their money while fearing infection.
With cases of coronavirus continuing to climb outside of China, health experts say that a global outbreak is highly likely. The impact of this is feared to push economies into recession, and the Fed said that although the US economy was “strong… the coronavirus poses evolving risks to economic activity.”
Gold jumped on the news, gaining over $35 per ounce in almost an hour. The rate cut weakened the dollar against the pound, muting the gains in Sterling, but only slightly – gaining £20 per ounce.
With more cases expected in the coming weeks, the economic damage is only expected to worse, and demand for safe haven assets grow.